helath net 02_10q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-12718

HEALTH NET, INC.
(Exact name of registrant as specified in its charter)

Delaware 95-4288333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21650 Oxnard Street, Woodland Hills, CA 91367
(Address of principal executive offices) (Zip Code)

(818) 676-6000
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of
the latest practicable date:
The number of shares outstanding of the registrant’s Class A Common Stock as of November 5,
2002 was 123,814,291 (excluding 6,483,574 shares held as treasury stock) and no shares of Class B
Common Stock were outstanding as of such date.

HEALTH NET, INC.
INDEX TO FORM 10-Q

Page

Part I—FINANCIAL INFORMATION
Item 1—Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31,
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Third Quarters Ended
September 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the Nine Months Ended
September 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 3—Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . 44
Item 4—Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Part II—OTHER INFORMATION
Item 1—Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 2—Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 3—Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 4—Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 5—Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 6—Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

2

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH NET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)

September 30, December 31,
2002 2001

ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . $ 827,036 $ 909,594
Investments—available for sale . . . . . ........ . . . . . . . . . . . . . . . . . . 930,065 856,560
Premiums receivable, net . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 142,737 183,824
Amounts receivable under government contracts . . . . . . . . . . . . . . . . . . . 106,291 99,619
Reinsurance and other receivables . . . ........ . . . . . . . . . . . . . . . . . . 100,245 136,854
Deferred taxes . . . . . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 78,319 72,909
Other assets . . . . . . . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 99,462 82,583
Total current assets . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 2,284,155 2,341,943
Property and equipment, net . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 242,705 253,063
Goodwill, net . . . . . . . . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 762,066 764,381
Other intangible assets, net . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 23,269 37,433
Deferred taxes . . . . . . . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . — 23,359
Other noncurrent assets . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . 126,953 139,468
Total Assets . . . . . . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . $3,439,148 $3,559,647

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Reserves for claims and other settlements . . . . . . . . . . . . . . . . . . . . . . . . $1,273,105 $1,278,036
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,550 166,842
Amounts payable under government contracts . . . . . . . . . . . . . . . . . . . . 3,530 2,284
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,656 308,364
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,636,841 1,755,526
Revolving credit facilities and capital leases . . . . . . . . . . . . . . . . . . . . . . . . — 195,182
Senior notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398,785 398,678
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,886 —
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,677 44,749
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,093,189 2,394,135
Commitments and contingencies
Stockholders’ Equity:
Common stock and additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 724,235 662,867
Restricted common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,913 —
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,672) —
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781,326 597,753
Treasury Class A common stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . (172,072) (95,831)
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . 12,229 723
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345,959 1,165,512
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . $3,439,148 $3,559,647

See accompanying notes to condensed consolidated financial statements.

3

HEALTH NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)

Third Quarter Ended
September 30,
2002 2001

REVENUES
Health plan services premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,106,657 $2,078,628
Government contracts/Specialty services . . . . . . . . . . . . . . . . . . . . . . . . . . 452,786 447,862
Investment and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,207 18,449
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577,650 2,544,939
EXPENSES
Health plan services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745,261 1,772,020
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,068 329,339
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,154 15,279
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,734 9,426
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,837 12,735
Asset impairment and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . 12,167 79,667
Loss on assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 —
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,473,083 2,541,248

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,567 3,691
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,543 1,365
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,024 $ 2,326

Basic and diluted earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.55 $ 0.02
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.55 $ 0.02

Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,963 123,315
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,091 124,965


4

HEALTH NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)

Nine Months Ended
September 30,
2002 2001

REVENUES
Health plan services premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,170,809 $6,257,828
Government contracts/Specialty services . . . . . . . . . . . . . . . . . . . . . . . . . . 1,329,752 1,253,651
Investment and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,871 68,287
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,553,432 7,579,766
EXPENSES
Health plan services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,183,812 5,355,613
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 984,520 1,001,641
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,764 48,339
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,367 28,265
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,364 43,581
Asset impairment and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . 12,167 79,667
Loss on assets held for sale and sale of businesses and properties . . . . . . . 5,000 76,072
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,261,787 7,531,295

Income from operations before income taxes and cumulative effect of a
change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,645 48,471
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,131 17,935
Income from operations before cumulative effect of a change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,514 30,536
Cumulative effect of a change in accounting principle, net of tax . . . . . . . . . . (8,941) —
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,573 $ 30,536

Basic earnings per share:
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.54 $ 0.25
Cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . (0.07) —
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.47 $ 0.25

Diluted earnings per share:
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.52 $ 0.24
Cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . (0.07) —
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.45 $ 0.24

Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,822 123,065
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,683 125,084


5

HEALTH NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

Nine Months Ended
September 30,
2002 2001

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... $ 183,573 $ 30,536
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,131 76,604
Loss on assets held for sale and sale of businesses and properties . . . . . . . . 5,000 76,072
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,647 27,760
Cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . . 8,941 —
Other changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,563 2,663
Changes in assets and liabilities, net of the effects of dispositions:
Premiums receivable and unearned premiums . . . . . . . . . . . . . . . . . . . . . (62,750) (45,921)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,502 (12,857)
Amounts receivable/payable under government contracts . . . . . . . . . . . . . (5,426) 209,471
Reserves for claims and other settlements . . . . . . . . . . . . . . . . . . . . . . . . (3,992) 89,896
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,275 (6,900)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,464 447,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales or maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . ....... . . 509,461 596,019
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... . . (550,550) (673,030)
Net purchases of property and equipment . . . . . . . . . . . . . . . . . . ....... . . (36,537) (53,498)
Cash disposed in the sale of businesses and properties, net of cash received . . (5,474) (58,997)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... . . (11,578) (21,503)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (94,678) (211,009)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases . . . . . . 44,046 7,962
Proceeds from issuance of notes and other financing arrangements . . . . . . . . . 50,000 601,102
Repayment of borrowings on credit facilities and other financing arrangements (245,214) (747,516)
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74,176) —
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225,344) (138,452)

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . (82,558) 97,863
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . 909,594 1,046,735
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 827,036 $1,144,598


6

HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION
Health Net, Inc. (together with its subsidiaries referred to hereafter as the Company, we, us or
our) prepared the condensed consolidated financial statements following the rules and regulations of
the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules
and regulations, certain footnotes or other financial information that are normally required by
accounting principles generally accepted in the United States of America (GAAP) can be condensed or
omitted if they substantially duplicate the disclosures contained in the annual audited financial
statements.
We are responsible for the accompanying unaudited condensed consolidated financial statements.
These condensed consolidated financial statements include all normal and recurring adjustments that
are considered necessary for the fair presentation of our financial position and operating results in
accordance with GAAP. In accordance with GAAP, we make certain estimates and assumptions that
affect the reported amounts. Actual results could differ from estimates. As these are condensed
consolidated financial statements, one should also read our 2001 consolidated financial statements and
notes included in our Form 10-K for the year ended December 31, 2001.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the
results and trends in these interim financial statements may not be indicative of those for the full year.
Certain amounts in the 2001 condensed consolidated financial statements have been reclassified to
conform to the 2002 presentation. The reclassifications have no effect on net income or stockholders’
equity as previously reported.

2. COMPREHENSIVE INCOME
Our comprehensive income for the third quarter and nine months ended September 30 is as
follows (amounts in millions):

Third Quarter Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69.0 $2.3 $183.6 $30.5
Other comprehensive income, net of tax:
Net change in unrealized appreciation on investments
available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 2.5 11.5 6.0
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . $75.6 $4.8 $195.1 $36.5

3. EARNINGS PER SHARE
Basic earnings per share excludes dilution and reflects net income or loss divided by the weighted
average shares of common stock outstanding during the periods presented. Diluted earnings per share
is based upon the weighted average shares of common stock and dilutive common stock equivalents (all
of which are comprised of stock options and restricted stock) outstanding during the periods presented.
Common stock equivalents arising from dilutive stock options are computed using the treasury stock
method. There were 1,128,000 and 1,861,000 shares of dilutive common stock equivalents for the third
quarter and nine months ended September 30, 2002, respectively, and 1,650,000 and 2,019,000 shares of

7

HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3. EARNINGS PER SHARE (Continued)
dilutive common stock equivalents for the third quarter and nine months ended September 30, 2001,
respectively.
Options to purchase an aggregate of 6,008,000 and 2,486,000 shares of common stock during the
third quarter and nine months ended September 30, 2002, respectively, and an aggregate of 6,925,000
and 6,849,000 shares of common stock during the third quarter and nine months ended September 30,
2001, respectively, were not included in the computation of diluted earnings per share because the
options’ exercise prices were greater than the average market price of the common stock for each
respective period.
In April 2002, our board of directors authorized us to repurchase up to $250 million (net of
proceeds and tax benefits from the future exercise of employee stock options) of our Class A Common
Stock. As of September 30, 2002, we had repurchased an aggregate of 3,162,300 shares of our Class A
Common Stock under this repurchase program (see Note 10).

4. SEGMENT INFORMATION
Our segment information for the third quarter and nine months ended September 30, 2002 and
2001 is as follows (amounts in millions):

Government
Contracts/
Health Plan Specialty
Services Services Total

Third Quarter Ended September 30, 2002
Revenues from external sources . .......................... $2,106.7 $ 452.8 $2,559.5
Intersegment revenues . . . . . . . .......................... — 28.9 28.9
Segment profit . . . . . . . . . . . . . .......................... 121.5 3.3 124.8
Third Quarter Ended September 30, 2001
Revenues from external sources . .......................... $2,078.6 $ 447.9 $2,526.5
Intersegment revenues . . . . . . . .......................... — 30.2 30.2
Segment profit . . . . . . . . . . . . . .......................... 65.6 10.9 76.5
Nine Months Ended September 30, 2002
Revenues from external sources . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,170.8 $1,329.8 $7,500.6
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 88.7 88.7
Segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280.0 30.4 310.4
Nine Months Ended September 30, 2001
Revenues from external sources . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,257.8 $1,253.7 $7,511.5
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 77.0 77.0
Segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171.6 27.6 199.2
Prior to January 1, 2002, our basis of measurement of segment profit or loss was pretax income or
loss after allocation of budgeted costs for our corporate shared services to each of our reportable
segments, Health Plan Services and Government Contracts/Specialty Services. Shared service expenses
include costs for information technology, finance, operations and certain other administrative functions.

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4. SEGMENT INFORMATION (Continued)
Beginning January 1, 2002, we implemented several initiatives to reduce our selling, general and
administrative (SG&A) expenses. At that time, we changed our methodology from allocating budgeted
costs to allocating actual expenses incurred for corporate shared services to more properly reflect
segment costs. Management now uses the segment pretax profit or loss subsequent to the allocation of
actual shared services expenses as its measurement of segment performance. We changed our
methodology of determining segment pretax profit or loss to better reflect management’s revised view
of the relative costs incurred proportionally by our reportable segments. Certain prior period balances
have been reclassified to conform to management’s current view of segment pretax profit or loss.
A reconciliation of the total reportable segments’ measures of profit to the Company’s
consolidated income before income taxes and cumulative effect of a change in accounting principle for
the third quarter and nine months ended September 30, 2002 and 2001 is as follows (amounts in
millions):

Third Quarter Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001

Total segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $124.8 $76.5 $310.4 $199.2
(Loss) income from other corporate entities . . . . . . . . . . . (14.0) 3.2 (20.3) (15.7)
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2 16.4 49.1 64.4
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.8) (12.7) (30.4) (43.6)
Asset impairment and restructuring charges . . . . . . . . . . . (12.2) (79.7) (12.2) (79.7)
Loss on assets held for sale and sale of businesses and
properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... (2.4) — (5.0) (76.1)

Income before income taxes and cumulative effect of a
change in accounting principle as reported . . . . . . . . . . $104.6 $ 3.7 $291.6 $ 48.5

(Loss) income from other corporate entities, which are not part of our Health Plan Services and
Government Contracts/Specialty Services reportable segments, are excluded from our measurement of
segment performance. Other corporate entities include our facilities, warehouse, reinsurance and
surgery center subsidiaries. Investment income and interest expense are also excluded from our
measurement of segment performance, as these items are not managed within either of our reportable
segments. Asset impairment, restructuring charges and loss on assets held for sale and sale of
businesses and properties are excluded from our measurement of segment performance since they are
unusual items and are not managed within either of our reportable segments.

5. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
Asset Impairments
During the third quarter ended September 30, 2002, pursuant to Statement of Financial
Accounting Standards (SFAS) No. 115, ‘‘Accounting for Certain Investments in Debt and Equity
Securities’’ (SFAS No. 115), we evaluated the carrying value of our investments available for sale in
CareScience, Inc. The common stock of CareScience, Inc. has been consistently trading below $1.00 per
share since early September 2002 and is at risk of being delisted. As a result, we have determined that

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5. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES (Continued)
the decline in the fair value of CareScience’s common stock was other than temporary. The fair value
of these investments was determined based on quotations available on a securities exchange registered
with the SEC as of September 30, 2002. Accordingly, we recognized a pretax $3.6 million write-down in
the carrying value of these investments which is classified as asset impairment and restructuring charges
for the third quarter ended September 30, 2002. Subsequent to the write-down, our new cost basis in
our investment in CareScience, Inc. was $2.6 million as of September 30, 2002. Our holdings in
CareScience, Inc. are included in investments-available for sale on the accompanying condensed
consolidated balance sheets.
Pursuant to SFAS No. 115 and SFAS No. 118, ‘‘Accounting by Creditors for Impairment of a
Loan—Income Recognition and Disclosures’’, we evaluated the carrying value of our investments in
convertible preferred stock and subordinated notes of AmCareco, Inc. arising from a previous
divestiture of health plans in Louisiana, Oklahoma and Texas in 1999. Since August 2002, authorities in
these states have taken various actions, including license denials and liquidation-related processes, that
have caused us to determine that the carrying value of these assets is no longer recoverable.
Accordingly, we wrote off the total carrying value of our investment of $7.1 million which was included
as a charge in asset impairment and restructuring charges for the third quarter ended September 30,
2002. Our investment in AmCareco had been included in other noncurrent assets on the accompanying
condensed consolidated balance sheets.
As of September 30, 2001, pursuant to SFAS No. 121, ‘‘Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed Of’’ (SFAS No. 121), we evaluated the carrying value
of certain long-lived assets that were affected by the restructuring plan implemented during the third
quarter ended September 30, 2001. The affected assets were primarily comprised of information
technology systems and equipment, software development projects and leasehold improvements. We
determined that the carrying values of these assets exceeded their estimated fair values. The fair values
of these assets were determined based on market information available for similar assets. For certain of
the assets, we determined that they had no continuing value to us due to our abandoning certain plans
and projects in connection with our workforce reductions. Accordingly, we recorded asset impairment
charges of $27.9 million consisting entirely of non-cash write-downs of equipment, building
improvements and software application and development costs, which charges were included in asset
impairment and restructuring charges. The carrying value of these assets was $7.4 million and
$9.0 million as of September 30, 2002 and December 31, 2001, respectively.
The asset impairment charges of $27.9 million included in asset impairment and restructuring
charges for the third quarter ended September 30, 2001 consist of $10.8 million for write-downs of
assets related to the consolidation of four data centers, including all computer platforms, networks and
applications into a single processing facility; $16.3 million related to abandoned software applications
and development projects resulting from the workforce reductions, migration of certain systems and
investments to more robust technologies; and $0.8 million for write-downs of leasehold improvements.

Restructuring Charges
As part of our ongoing SG&A expense reduction efforts, during the third quarter of 2001, we
finalized a formal plan to reduce operating and administrative expenses for all business units within the
Company (the 2001 Plan). In connection with the 2001 Plan, we decided on enterprise-wide staff

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reductions and consolidations of certain administrative, financial and technology functions. We recorded
pretax restructuring charges of $79.7 million during the third quarter ended September 30, 2001 (the
2001 Charge). As of September 30, 2002, we had completed the 2001 Plan. As of September 30, 2002,
we had $8.6 million in severance and benefits and lease termination payments remaining to be paid
under the 2001 Plan. These payments will be made during the remainder of the respective severance
agreement and lease terms.

Severance And Benefit Related Costs
During the third quarter ended September 30, 2001, we recorded severance and benefit related
costs of $43.3 million related to enterprise-wide staff reductions in connection with the 2001 Plan,
which costs were included in the 2001 Charge. These reductions included the elimination of 1,517
positions throughout all functional groups, divisions and corporate offices within the Company. As of
September 30, 2002, the termination of employees had been completed and we recorded a modification
of $1.5 million to reflect an increase in the severance and related benefits in connection with the 2001
Plan from the initial amount of $43.3 million included in the 2001 Charge to a total of $44.8 million.
As of September 30, 2002, we had paid out $40.0 million for severance and related benefits in
connection with the 2001 Plan. The remaining balance of $4.8 million will be paid during the remainder
of the respective severance agreement terms.

Real Estate Lease Termination Costs
The 2001 Charge included charges of $5.1 million related to termination of lease obligations and
non-cancelable lease costs for excess office space resulting from streamlined operations and
consolidation efforts. Through September 30, 2002, we had paid $1.3 million of the termination
obligations. The remainder of the termination obligations of $3.8 million will be paid during the
remainder of the respective lease terms.

Other Costs
The 2001 Charge included charges of $3.4 million related to costs associated with consolidating
certain data center operations and systems and other activities which were completed and paid for in
the first quarter ended March 31, 2002.

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The following tables summarize the charges we recorded in 2001 and activities related to those
charges during the nine months ended September 30, 2002 (amounts in millions):

2001 Activity Balance at
2001 Cash December 31,
Charges Payments Non-cash 2001

Severance and benefit related costs . . . . . . . . . . . . . . . $43.3 $(20.5) $— $22.8
Asset impairment costs . . . . . . . . . . . . . . . . . . . . . . . . 27.9 — (27.9) —
Real estate lease termination costs . . . . . . . . . . . . . . . . 5.1 (0.3) — 4.8
Other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 (0.4) (2.3) 0.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79.7 $(21.2) $(30.2) $28.3

2002 Activity
Balance at Balance at
December 31, Cash September 30, Expected Future
2001 Payments Non-cash Modification 2002 Cash Outlays

Severance and benefit related costs $22.8 $(19.5) $— $1.5 $4.8 $4.8
Real estate lease termination costs 4.8 (1.0) — — 3.8 3.8
Other costs . . . . . . . . . . . . . . . . . 0.7 (0.7) — — — —
Total . . . . . . . . . . . . . . . . . . . . . . $28.3 $(21.2) $— $1.5 $8.6 $8.6

6. ASSETS HELD FOR SALE AND DIVESTITURES
During the third quarter ended September 30, 2002, we entered into an agreement, subject to
certain contingency provisions, to sell a corporate facility building in Trumbull, Connecticut.
Accordingly, pursuant to SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived
Assets’’, we recorded a pretax $2.4 million estimated loss on assets held for sale consisting entirely of
non-cash write-downs of building and building improvements. The carrying value of these assets after
the write-downs was $7.9 million as of September 30, 2002. We expect the sale to close no later than
September 30, 2003. This corporate facility building is not being used in our operations.
Effective July 1, 2002, we sold our claims processing subsidiary, EOS Claims Services, Inc. (EOS
Claims), to Tristar Insurance Group, Inc. (Tristar). In connection with the sale, we received $500,000 in
cash, and also entered into a Payor Services Agreement. Under the Payor Services Agreement, Tristar
has agreed to exclusively use EOS Managed Care Services, Inc. (one of our remaining subsidiaries) for
various managed care services to its customers and clients. We estimated and recorded a $2.6 million
pretax loss on the sale of EOS Claims during the second quarter ended June 30, 2002. We did not
record any adjustments to the estimated pretax loss on the sale during the third quarter ended
September 30, 2002. EOS Claims, excluding the $2.6 million pretax loss on the sale, had total revenues
of $7.2 million and income before income taxes of $0.1 million for the nine months ended
September 30, 2002, total revenues of $3.4 million and $11.6 million for the three and nine months
ended September 30, 2001, respectively, and loss before income taxes of ($0.9) million and ($3.2)
million for the three and nine months ended September 30, 2001, respectively.

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6. ASSETS HELD FOR SALE AND DIVESTITURES (Continued)
As of the date of sale, EOS Claims had no net equity after dividends to its parent company and
the goodwill impairment charge taken in the first quarter ended March 31, 2002. EOS Claims was
reported as part of our Government Contracts/Specialty Services reportable segment.
Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida
Health Plan, Inc. (the Plan), to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we
received approximately $49 million which consists of $23 million in cash and approximately $26 million
in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility
building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured
five-year note bearing eight percent interest per annum. We estimated and recorded a $76.1 million
pretax loss on the sales of our Florida health plan and the related corporate facility building during the
second quarter ended June 30, 2001.
Under the Stock Purchase Agreement that evidenced the sale (as amended, the SPA), we, through
our subsidiary FH Assurance Company (FHAC), entered into a reinsurance agreement (the
Reinsurance Agreement) with the Plan. Under the terms of the Reinsurance Agreement, FHAC will
reimburse the Plan for certain medical and hospital expenses arising after the Florida health plan sale.
The Reinsurance Agreement will cover claims arising from all commercial and governmental health
care contracts or other agreements in force as of July 31, 2001 and any renewals thereof up to
18 months after July 31, 2001. The Reinsurance Agreement provides that the Plan will be reimbursed
for medical and hospital expenses relative to covered claims in excess of certain baseline medical loss
ratios, as follows:
• 88% for the six-month period commencing on August 1, 2001;
• 89% for the six-month period commencing on February 1, 2002;
• 90% for the six-month period commencing on August 1, 2002.
The Reinsurance Agreement is limited to $28 million in aggregate payments and is subject to the
following levels of coinsurance:
• 5% for the six-month period commencing on August 1, 2001;
• 10% for the six-month period commencing on February 1, 2002;
• 15% for the six-month period commencing on August 1, 2002.
If the baseline medical loss ratio is less than 90% at the end of the six-month period commencing
on August 1, 2002, Health Net is entitled to recover medical and hospital expenses below the 90%
threshold up to an amount to not exceed 1% of the total premiums for those members still covered
during the six-month period under the Reinsurance Agreement.
The maximum liability under the Reinsurance Agreement of $28 million was reported as part of
loss on assets held for sale as of June 30, 2001, since this was our best estimate of our probable
obligation under this arrangement. As the reinsured claims are submitted to FHAC, the liability is
reduced by the amount of claims paid.
The indemnification obligation is for all pending and threatened litigation as of the closing date
and certain specific provider contract interpretation or settlement disputes. At this time, we are unable

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6. ASSETS HELD FOR SALE AND DIVESTITURES (Continued)
to quantify an estimated liability related to the indemnified obligations due to the status and
uncertainty of any pending or threatened litigation and the specific provider contract disputes.
The SPA provides for the following three true-up adjustments that could result in an adjustment to
the loss on the sale of the Plan:
• A retrospective post-closing settlement of statutory equity based on subsequent adjustments to
the closing balance sheet for the Plan.
• A settlement of unpaid provider claims as of the closing date based on claim payments occurring
during a one-year period after the closing date.
• A settlement of the reinsured claims in excess of certain baseline medical loss ratios. Final
settlement is not scheduled to occur until the latter part of 2003. The development of claims and
claims related metrics and information provided by Florida Health Plan Holdings II, L.L.C. have
not resulted in any revisions to the maximum $28 million liability we originally estimated.
We do not have sufficient information regarding the true-up adjustments to estimate any
adjustment to the recorded loss on the sale of the Plan as of September 30, 2002.
The Florida health plan, excluding the $76.1 million loss on sale, had total revenues of
$46.2 million and a pretax loss of ($3.7) million for the third quarter ended September 30, 2001, and
total revenues of $343.2 million and a pretax loss of ($18.7) million for the nine months ended
September 30, 2001. The effect of the suspension of the depreciation on the corporate facility building
was immaterial for the three and nine months ended September 30, 2001. At the date of sale, the
Florida health plan had $41.5 million in net equity. The Florida health plan was reported as part of our
Health Plan Services reportable segment.

7. LEGAL PROCEEDINGS
SUPERIOR NATIONAL INSURANCE GROUP, INC.
We and our former wholly-owned subsidiary, Foundation Health Corporation (FHC), which
merged into Health Net, Inc. in January 2001, were named in an adversary proceeding, Superior
National Insurance Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc. and
Milliman & Robertson, Inc. (M&R), filed on April 28, 2000, in the United States Bankruptcy Court for
the Central District of California, case number SV00-14099GM. The lawsuit relates to the 1998 sale of
Business Insurance Group, Inc. (BIG), a holding company of workers’ compensation insurance
companies operating primarily in California, by FHC to Superior National Insurance Group, Inc.
(Superior).
On March 3, 2000, the California Department of Insurance seized BIG and Superior’s other
California insurance subsidiaries. On April 26, 2000, Superior filed for bankruptcy. Two days later,
Superior filed its lawsuit against us, FHC and M&R. Superior alleges in the lawsuit that:
• the BIG transaction was a fraudulent transfer under federal and California bankruptcy laws in
that Superior did not receive reasonably equivalent value for the $285 million in consideration
paid for BIG;

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7. LEGAL PROCEEDINGS (Continued)
• we, FHC and M&R defrauded Superior by making misstatements as to the adequacy of BIG’s
reserves;
• Superior is entitled to rescind its purchase of BIG;
• Superior is entitled to indemnification for losses it allegedly incurred in connection with the BIG
transaction;
• FHC breached the stock purchase agreement relating to the sale of BIG; and
• we and FHC were guilty of California securities laws violations in connection with the sale of
BIG.
Superior seeks $300 million in compensatory damages, unspecified punitive damages and the costs
of the action, including attorneys’ fees.
On August 1, 2000, a motion filed by us and FHC to remove the lawsuit from the jurisdiction of
the Bankruptcy Court to the United States District Court for the Central District of California was
granted. Pursuant to a June 12, 2002 intra-district transfer order, the lawsuit is now pending in the
District Court under case number CV02-5155 PA. On August 23, 2002, pursuant to a stipulation filed
by Superior and M&R, Superior dismissed all of its claims against M&R. We and Superior are
completing discovery and are engaged in pretrial motions.
We intend to defend ourselves vigorously in this litigation. While the final outcome of these
proceedings can not be determined at this time, based on information presently available we believe
that the final outcome of such proceedings will not have a material adverse effect upon our results of
operations or financial condition. However, our belief regarding the likely outcome of such proceedings
could change in the future and an unfavorable outcome could have a material adverse effect upon our
results of operations or financial condition.
FPA MEDICAL MANAGEMENT, INC.
Since May 1998, several complaints have been filed in federal and state courts seeking an
unspecified amount of damages on behalf of an alleged class of persons who purchased shares of
common stock, convertible subordinated debentures and options to purchase common stock of FPA
Medical Management, Inc. (FPA) at various times between February 3, 1997 and May 15, 1998. The
complaints name as defendants FPA, certain of FPA’s auditors, us and certain of our former officers.
The complaints allege that we and such former officers violated federal and state securities laws by
misrepresenting and failing to disclose certain information about a 1996 transaction between us and
FPA, about FPA’s business and about our 1997 sale of FPA common stock held by us. All claims against
our former officers were voluntarily dismissed from the consolidated class actions in both federal and
state court. In early 2000, we filed a motion to dismiss all claims asserted against us in the consolidated
federal class actions but have not formally responded to the other complaints. That motion has been
withdrawn without prejudice and the consolidated federal class actions have been stayed pending
resolution of matters in a related case in which we are not a party.
We intend to vigorously defend the actions. While the final outcome of these proceedings can not
be determined at this time, based on information presently available we believe that the final outcome
of such proceedings will not have a material adverse effect upon our results of operations or financial

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condition. However, our belief regarding the likely outcome of such proceedings could change in the
future and an unfavorable outcome could have a material adverse effect upon our results of operations
or financial condition.
STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.
Physicians Health Services, Inc. (PHS), a subsidiary of ours, was sued on December 14, 1999 in the
United States District Court in Connecticut by the Attorney General of Connecticut, Richard
Blumenthal, acting on behalf of a group of state residents. The lawsuit was premised on the Federal
Employee Retirement Income Security Act (ERISA) and alleged that PHS violated its duties under
ERISA by managing its prescription drug formulary in a manner that served its own financial interest
rather than those of plan beneficiaries. The suit sought to have PHS revamp its formulary system and
to provide patients with written denial notices and instructions on how to appeal. PHS filed a motion
to dismiss which asserted that the state residents the Attorney General purported to represent all
received a prescription drug appropriate for their conditions and therefore suffered no injuries
whatsoever, that his office lacked standing to bring the suit and that the allegations failed to state a
claim under ERISA. On July 12, 2000, the court granted PHS’ motion and dismissed the action. On
March 27, 2002, the United States Court of Appeals for the Second Circuit affirmed the district court’s
dismissal of the action. On June 25, 2002, the plaintiff filed a petition requesting that the United States
Supreme Court review the Second Circuit’s decision to affirm dismissal of the case. On October 7,
2002, the United States Supreme Court denied plaintiff’s petition for review.
We intend to vigorously defend the actions. While the final outcome of these proceedings can not
be determined at this time, based on information presently available we believe that the final outcome
of such proceedings will not have a material adverse effect upon our results of operations or financial
condition. However, our belief regarding the likely outcome of such proceedings could change in the
future and an unfavorable outcome could have a material adverse effect upon our results of operations
or financial condition.
IN RE MANAGED CARE LITIGATION
The Judicial Panel on Multidistrict Litigation (JPML) has transferred various class action lawsuits
against managed care companies, including us, to the United States District Court for the Southern
District of Florida for coordinated or consolidated pretrial proceedings in In re Managed Care
Litigation, MDL 1334. This proceeding is divided into two tracks, the subscriber track, which includes
actions brought on behalf of health plan members, and the provider track, which includes suits brought
on behalf of physicians.

Subscriber Track
The subscriber track includes the following actions involving us: Pay v. Foundation Health Systems,
Inc. (filed in the Southern District of Mississippi on November 22, 1999), Romero v. Foundation Health
Systems, Inc. (filed in the Southern District of Florida on June 23, 2000 as an amendment to a suit filed
in the Southern District of Mississippi), State of Connecticut v. Physicians Health Services of
Connecticut, Inc. (filed in the District of Connecticut on September 7, 2000), and Albert v. CIGNA
Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and
Foundation Health Systems, Inc.) (filed in the District of Connecticut on September 7, 2000). The Pay

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and Romero actions seek certification of nationwide class actions, unspecified damages and injunctive
relief and allege that cost containment measures used by our health maintenance organizations,
preferred provider organizations and point-of-service health plans violate provisions of the federal
Racketeer Influenced and Corrupt Organizations Act (RICO) and ERISA.
The Albert suit also alleges violations of ERISA and seeks certification of a nationwide class and
unspecified damages and injunctive relief. The State of Connecticut action asserts claims against our
subsidiary, Physicians Health Services of Connecticut, Inc., and us that are similar, if not identical, to
those asserted in the previous lawsuit which, as discussed above, the United States Court of Appeals
for the Second Circuit affirmed dismissal of on March 27, 2002.
We filed a motion to dismiss the lead subscriber track case, Romero v. Foundation Health
Systems, Inc., and on June 12, 2001, the court entered an order dismissing all claims in that suit
brought against us with leave for the plaintiffs to re-file an amended complaint. On this same date, the
court stayed discovery until after the court ruled upon motions to dismiss the amended complaints and
any motions to compel arbitration. On June 29, 2001, the plaintiffs in Romero filed a third amended
class action complaint which re-alleges causes of action under RICO, ERISA, common law civil
conspiracy and common law unjust enrichment. The third amended class action complaint seeks
unspecified compensatory and treble damages and equitable relief. On July 24, 2001, the court heard
oral argument on class certification issues. On August 13, 2001, we filed a motion to dismiss the third
amended complaint in Romero. On February 20, 2002, the court ruled on our motion to dismiss the
third amended complaint in Romero. The court dismissed all claims against us except one ERISA claim.
The court further ordered that plaintiffs may file amended complaints, but that no new plaintiffs or
claims will be permitted without prior leave of the court. Both plaintiffs and defendants filed motions
for reconsideration relating to various parts of the court’s dismissal order, which motions were denied.
On March 25, 2002, the district court amended its February 20, 2002 dismissal order to include the
following statement: ‘‘This Order involves a controlling question of law, namely, whether a
managed-care subscriber who has not actually been denied care can state a claim under RICO, about
which there is substantial ground for difference of opinion and an immediate appeal may materially
advance the ultimate termination of this litigation.’’ On April 5, 2002, we joined in a petition to the
United States Court of Appeals for the Eleventh Circuit for permission to appeal the question certified
by the district court. On May 10, 2002, the Eleventh Circuit denied the petition. On June 26, 2002, the
plaintiffs filed with the Court a notice that they will not file an amended complaint against the
Company. Health Net filed its answer on July 26, 2002. On July 29, 2002, the Court ordered that the
stay of discovery is lifted effective September 30, 2002.
On September 26, 2002, the Court denied plaintiff Romero’s motion for class certification. The
Court scheduled plaintiff Romero’s individual case for trial in May 2003. On October 1, 2002, the
Court issued an order referring plaintiff Romero’s individual case to mediation. On October 10, 2002,
plaintiff Romero filed a motion requesting that the Court reconsider its decision to deny class
certification. Health Net has opposed plaintiff’s request for reconsideration.

Provider Track
The provider track includes the following actions involving us: Shane v. Humana, Inc., et al.
(including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on August 17,

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2000 as an amendment to a suit filed in the Southern District of Mississippi), California Medical
Association v. Blue Cross of California, Inc., PacifiCare Health Systems, Inc., PacifiCare Operations, Inc.
and Foundation Health Systems, Inc. (filed in the Northern District of California in May 2000), Klay v.
Prudential Ins. Co. of America, et al. (including Foundation Health Systems, Inc.) (filed in the Southern
District of Florida on February 22, 2001 as an amendment to a case filed in the Northern District of
California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in
Connecticut state court on February 14, 2001), Lynch v. Physicians Health Services of Connecticut, Inc.
(filed in Connecticut state court on February 14, 2001), Sutter v. Health Net of the Northeast, Inc.
(D. N.J.) (filed in New Jersey state court on April 26, 2002), and Medical Society of New Jersey v. Health
Net, Inc., et al., (D. N.J.) (filed in New Jersey state court on May 8, 2002.)
On August 17, 2000, a complaint was filed in the United States District Court for the Southern
District of Florida in Shane, the lead provider track action in MDL 1334. The complaint seeks
certification of a nationwide class action on behalf of physicians and alleges that the defendant
managed care companies’ methods of reimbursing physicians violate provisions of RICO, ERISA,
certain federal regulations and various state laws. The action seeks unspecified damages and injunctive
relief.
On September 22, 2000, we filed a motion to dismiss, or in the alternative to compel arbitration, in
Shane. On December 11, 2000, the court granted in part and denied in part our motion to compel
arbitration. Under the court’s December arbitration order, plaintiff Dennis Breen, the single named
plaintiff to allege a direct contractual relationship with us in the August complaint, was compelled to
arbitrate his direct claims against us. We filed an appeal in the United States Court of Appeals for the
11th Circuit seeking to overturn the portion of the district court’s December ruling that did not order
certain claims to arbitration. On April 26, 2001, the court modified its December arbitration order and
is now retaining jurisdiction over certain direct claims of plaintiff Breen relating to a single contract.
On March 2, 2001, the District Court for the Southern District of Florida issued an order in Shane
granting the dismissal of certain claims with prejudice and the dismissal of certain other claims without
prejudice, and denying the dismissal of certain claims.
On March 26, 2001, a consolidated amended complaint was filed in Shane against managed care
companies, including us. This consolidated complaint adds new plaintiffs, including Leonard Klay and
the California Medical Association (who, as set forth below, had previously filed claims against the
Company), and has, in addition to revising the pleadings of the original claims, added a claim under
the California Business and Professions Code. On May 1, 2001, we filed a motion to compel arbitration
in Shane of the claims of all individual plaintiffs that allege to have treated persons insured by us. On
that same date, we filed a motion to dismiss this action. Preliminary discovery and briefing regarding
the plaintiffs’ motion for class certification has taken place. On May 7, 2001, the court heard oral
argument on class certification issues in Shane. On May 9, 2001, the court entered a scheduling order
permitting further discovery. On May 14, 2001, Health Net joined in a motion for stay of proceedings
in Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (00-1334-MD) in the
United States District Court for the Southern District of Florida pending appeal in the 11th Circuit
Court of Appeals. On June 17, 2001, the district court stayed discovery until after the district court
ruled upon motions to dismiss and motions to compel arbitration. This order staying discovery also
applied to other actions transferred to the district court by the Judicial Panel on Multidistrict

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Litigation, namely California Medical Association v. Blue Cross of California, Inc. et al., Klay v. Prudential
Ins. Co. of America, et al., Connecticut State Medical Society v. Physicians Health Services of
Connecticut, Inc., and Lynch v. Physicians Health Services of Connecticut, Inc. On June 25, 2001, the 11th
Circuit Court of Appeals entered an order staying proceedings in the district court pending resolution
of the appeals relating to the district court’s ruling on motions to compel arbitration. On March 14,
2002, the 11th Circuit affirmed the district court’s ruling on motions to compel arbitration. On
March 25, 2002, the plaintiffs filed with the Eleventh Circuit a motion for relief from the stay. We
joined in an opposition to plaintiff’s motion and joined a petition for rehearing of the arbitration issues
before the entire Eleventh Circuit panel. On June 21, 2001, the Eleventh Circuit denied the petition for
rehearing. Certain defendants filed a petition with the United States Supreme Court requesting review
of a portion of the Eleventh Circuit’s decision to affirm the district court’s arbitration order. On
July 12, 2002, the plaintiffs filed a motion requesting leave to amend their complaint. On July 29, 2002,
the Court ordered that the stay of discovery is lifted effective September 30, 2002.
On September 26, 2002, the Court granted plaintiffs’ motion for class certification, scheduled trial
to begin in May 2003, and granted plaintiffs’ request for leave to amend their complaint. The new
complaint adds another managed care company as a defendant, adds the Florida Medical Society and
the Louisiana Medical Society as plaintiffs, withdraws Dennis Breen as a named plaintiff, and adds
claims under the New Jersey Consumer Fraud Act and the Connecticut Unfair Trade Practices Act
against defendants other than Health Net. On October 1, 2002, the Court issued an order referring the
lead provider track case to mediation. On October 10, 2002, the defendants filed a petition requesting
that the Eleventh Circuit review the district court’s order granting class status. That same day, the
defendants also filed a motion requesting that the district court stay discovery pending ruling on the
appeal by the Eleventh Circuit, and pending ruling by the district court on the defendants’ motion to
dismiss and motions to compel arbitration. On October 15, 2002, the United States Supreme Court
agreed to review a portion of the Eleventh Circuit’s decision to affirm the district court’s arbitration
order. Health Net has requested that the district court stay discovery against it pending ruling by the
Supreme Court on arbitration issues. On October 18, 2002, the defendants filed a motion to dismiss the
plaintiffs’ amended complaint. On November 6, 2002, the district court denied the defendants’
October 10, 2002 motion requesting a stay of discovery.
The CMA action alleges violations of RICO, certain federal regulations and the California
Business and Professions Code and seeks declaratory and injunctive relief, as well as costs and
attorneys’ fees. As set forth above, on March 26, 2001, the California Medical Association was named
as an additional plaintiff in the consolidated amended complaint filed in the Shane action.
The Klay suit is a purported class action allegedly brought on behalf of individual physicians in
California who provided health care services to members of the defendants’ health plans. The
complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and
Professions Code and certain state common law doctrines, and seeks declaratory and injunctive relief,
and damages. As set forth above, on March 26, 2001, Leonard Klay was named as an additional
plaintiff in the consolidated amended complaint filed in the Shane action.
The CSMS case was originally brought in Connecticut state court against Physicians Health
Services of Connecticut, Inc. (PHS-CT) alleging violations of the Connecticut Unfair Trade Practices
Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede

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HEALTH NET, INC.
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and reduce lawful reimbursement to physicians who rendered medically necessary health care services
to PHS-CT health plan members. The complaint, which is similar to others filed against us and other
managed care companies, seeks declaratory and injunctive relief. On March 13, 2001, the Company
removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs
moved to remand the action to state court and the federal District Court of Connecticut consolidated
this action and Lynch v. Physicians Health Services of Connecticut, Inc., along with similar actions against
Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New
England, et al. PHS-CT has not yet responded to the complaint.
The Lynch case was also originally filed in Connecticut state court. This case was purportedly
brought on behalf of physician members of the Connecticut State Medical Society who provide health
care services to PHS-CT health plan members pursuant to provider service contracts. The complaint
alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or
delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above
filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and
injunctive relief and damages. On March 13, 2001, we removed this action to federal court. Before this
case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the
federal District Court of Connecticut consolidated this action and CSMS v. Physicians Health Services of
Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled
CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the
complaint.
On April 26, 2002, plaintiff John Ivan Sutter, M.D., P.A. filed an amended complaint in New
Jersey state court joining Health Net of the Northeast, Inc. (Health Net of the Northeast), a subsidiary
of ours, in an action originally brought against Horizon Blue Cross Blue Shield of New Jersey, Inc.,
CIGNA Healthcare of New Jersey, Inc. and CIGNA Corp (collectively known as CIGNA), United
Healthcare of New Jersey, Inc. and United Healthcare Insurance Company and Oxford Health
Plans, Inc. The complaint seeks certification of a statewide class of healthcare providers who render or
have rendered services to patients who are members of healthcare plans sponsored by the defendants.
Plaintiff alleges that the defendants engage in unfair and deceptive acts and practices which are
designed to delay, deny, impede and reduce compensation to physicians. The complaint seeks
unspecified damages and sets forth causes of action for breach of contract, breach of the implied duty
of good faith and fair dealing, violations of the New Jersey Prompt Payment Act and the Healthcare
Information Networks and Technologies Act (the HINT Act), reformation, violations of the New Jersey
Consumer Fraud Act, unjust enrichment and conversion. On May 22, 2002, the New Jersey state court
severed the action filed by Dr. Sutter into five separate cases, including an action against Health Net of
the Northeast only. On May 24, 2002, Health Net of the Northeast removed the case against it to
federal court. That same day, the CIGNA entities removed plaintiff Sutter’s action against them to
federal court and the United Healthcare entities removed plaintiff Sutter’s action against them to
federal court. Plaintiff moved to remand all of these cases to state court and the defendants moved to
stay the cases pending ruling by the JPML as to whether these cases should be transferred to MDL
1334 for coordinated or consolidated pretrial proceedings. On July 9, 2002, the federal district court
denied plaintiff’s motion to remand without prejudice, consolidated the cases against Health Net of the
Northeast, the CIGNA entities, and the United Healthcare entities into one case for pretrial

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proceedings, and stayed the case pending the JPML’s ruling on transfer to MDL 1334. On July 18,
2002, the JPML transferred this action to MDL 1334 for coordinated or consolidated pretrial
proceedings. On September 23, 2002, plaintiff filed in the MDL proceeding a motion to remand to
state court. On November 5, 2002, defendants moved to suspend briefing on remand.
On May 8, 2002, the Medical Society of New Jersey filed a complaint in New Jersey state court
against us and our subsidiaries Health Net of the Northeast, Inc., First Option Health Plan of New
Jersey, Inc., and Health Net of New Jersey, Inc. (the Health Net defendants). Plaintiff brought this
action on its own behalf and purportedly on behalf of its physician members and alleges that the
Health Net defendants engage in practices which are designed to delay, deny, impede and reduce
compensation to physicians. Plaintiff has requested declaratory and injunctive relief and has set forth
causes of action for violation of public policy, violations of the New Jersey Consumer Fraud Act,
violations of the HINT Act and tortious interference with prospective economic relations. On June 14,
2002 the Health Net defendants removed this case to federal court. On July 3, 2002, the Health Net
defendants filed a motion to stay this action pending ruling by JPML on whether to transfer this case
to MDL 1334. On July 15, 2002, plaintiff filed a motion to remand this case to state court. On
August 2, 2002, the JPML transferred this case to MDL 1334 for coordinated or consolidated pretrial
proceedings.
We intend to defend ourselves vigorously in this litigation. While the final outcome of these
proceedings can not be determined at this time, based on information presently available we believe
that the final outcome of such proceedings will not have a material adverse effect upon our results of
operations or financial condition. However, our belief regarding the likely outcome of such proceedings
could change in the future and an unfavorable outcome could have a material adverse effect upon our
results of operations or financial condition.
MISCELLANEOUS PROCEEDINGS
We and certain of our subsidiaries are also parties to various other legal proceedings, many of
which involve claims for coverage encountered in the ordinary course of our business. While the final
outcome of these proceedings can not be determined at this time, based on information presently
available we believe that the final outcome of such proceedings will not have a material adverse effect
upon our results of operations or financial condition. However, our belief regarding the likely outcome
of such proceedings could change in the future and an unfavorable outcome could have a material
adverse effect upon our results of operations or financial condition.

8. CHANGES IN ACCOUNTING PRINCIPLES
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB) issued two new pronouncements:
SFAS No. 141, ‘‘Business Combinations,’’ and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’
SFAS No. 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS No. 141 also apply to all
business combinations accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of the acquisition is July 2001 or later). Transition provisions that applied to business

21

HEALTH NET, INC.
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8. CHANGES IN ACCOUNTING PRINCIPLES (Continued)
combinations completed before July 1, 2001 that were accounted for by the purchase method had no
impact on us.
Effective January 1, 2002, we adopted SFAS No. 142 which, among other things, eliminates
amortization of goodwill and other intangibles with indefinite lives. Intangible assets, including goodwill,
that are not subject to amortization will be tested for impairment annually or more frequently if events
or changes in circumstances indicate that we might not recover the carrying value of these assets. The
impairment test follows a two-step approach. The first step determines if the goodwill is potentially
impaired; the second step measures the amount of the impairment loss, if necessary. Under the first
step, goodwill is considered potentially impaired if the value of the reporting unit is less than the
reporting unit’s carrying amount, including goodwill. Under the second step, the impairment loss is
then measured as the excess of recorded goodwill over the fair value of goodwill, as calculated. The fair
value of goodwill is calculated by allocating the fair value of the reporting unit to all the assets and
liabilities of the reporting unit as if the reporting unit was purchased in a business combination and the
purchase price was the fair value of the reporting unit.
We identified the following six reporting units with goodwill within our businesses: Health Plans,
Government Contracts, Managed Health Network (MHN), Dental & Vision, Subacute and Employer
and Occupational Service Group (EOSG). In accordance with the transition requirements of SFAS
No. 142, we completed an evaluation of goodwill at each of our reporting units upon adoption of this
Standard. We also re-assessed the useful lives of our other intangible assets and determined that they
properly reflect the estimated useful lives of these assets. As a result of these impairment tests, we
identified goodwill impairment at our behavioral health subsidiary, MHN, and at our managed care and
bill review unit, EOSG, in the amounts of $3.5 million and $5.4 million, respectively. Accordingly, we
recorded an impairment charge of goodwill of $8.9 million, net of tax benefit of $0, which has been
reflected as a cumulative effect of a change in accounting principle in the consolidated statement of
operations for the first quarter ended March 31, 2002. As part of our annual goodwill impairment test,
we completed an evaluation of goodwill at each of our reporting units as of June 30, 2002. No further
goodwill impairments were identified in any of our reporting units. We will perform our annual
goodwill impairment test as of June 30 in future years.
Our measurement of fair value was based on utilization of both the income and market
approaches to fair value determination. We used an independent third-party professional services firm
with knowledge and experience in performing fair value measurements to assist us in the impairment
testing and measurement process. The income approach was based on a discounted cash flow
methodology. The discounted cash flow methodology is based upon converting expected cash flows to
present value. Annual cash flows were estimated for each year of a defined multi-year period until the
growth pattern becomes stable. The interim cash flows expected after the growth pattern becomes
stable were calculated using an appropriate capitalization technique and then discounted. The market
approach used a market valuation methodology which included the selection of companies engaged in a
line (or lines) of business similar to the Company to be valued and an analysis of the comparative
operating results and future prospects of the Company in relation to the guideline companies selected.
The market price multiples are selected and applied to the Company based on the relative
performance, future prospects and risk profiles of the company in comparison to the guideline
companies. Methodologies for selecting guideline companies include the exchange methodology and the

22

HEALTH NET, INC.
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acquisition methodology. The exchange methodology is based upon transactions of minority-interests in
publicly traded companies engaged in a line (or lines) of business similar to the Company. The public
companies selected are defined as guideline companies. The acquisition methodology involved analyzing
the transaction involving similar companies that have been bought and sold in the public marketplace.
The following table illustrates the effect of adopting SFAS No. 142 on net income as previously
reported (amounts in millions, except per share data):

Third Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69.0 $ 2.3 $183.6 $30.5
Add back: Goodwill amortization (net of tax effect) . . . . . . — 6.0 — 18.0
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69.0 $ 8.3 $183.6 $48.5

Basic earnings per share:
Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.55 $0.02 $ 1.47 $0.25
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.55 $0.07 $ 1.47 $0.40

Diluted earnings per share:
Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.55 $0.02 $ 1.45 $0.24
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.55 $0.07 $ 1.45 $0.39

Differences between the sum of the quarterly and year-to-date earnings per share amounts are due
to rounding.
The changes in the carrying amount of goodwill by reportable segment are as follows (in millions):

Government
Contracts/
Health Plan Specialty
Services Services Total

Balance at December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $741.7 $49.5 $791.2
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.8) (1.8) (27.6)
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 — 0.8
Balance at December 31, 2001 . . . . . . . . . . . . .... . . . . . . . . . . . . . 716.7 47.7 764.4
Impairment losses . . . . . . . . . . . . . . . . . . . . . .... . . . . . . . . . . . . . — (8.9) (8.9)
Reclassification from other intangible assets . . .... . . . . . . . . . . . . . 6.9 — 6.9
Goodwill written off related to sale of business unit . . . . . . . . . . . . . (0.3) (0.3)
Balance at September 30, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $723.6 $38.5 $762.1

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As part of adopting SFAS No. 142, we transferred $6.9 million of other intangible assets to
goodwill since they did not meet the new criteria for recognition apart from goodwill. These other
intangible assets were acquired through our previous purchase transactions. In addition, other
intangible assets as of September 30, 2002 decreased from December 31, 2001 due to removal of fully
amortized intangible assets.
The intangible assets that continue to be subject to amortization are as follows (in millions):

Gross
Carrying Accumulated Net Amortization
Amount Amortization Balance Period (in years)
As of September 30, 2002:
Provider networks . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35.7 $ (15.5) $20.2 14-40
Employer groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.9 (90.1) 2.8 11-23
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 (1.2) 0.3 1
$130.1 $(106.8) $23.3
As of December 31, 2001:
Provider networks . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35.7 $ (14.2) $21.5 14-40
Employer groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.9 (85.2) 7.7 11-23
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.0 (20.8) 8.2 40
$157.6 $(120.2) $37.4

Estimated annual pretax amortization expense for other intangible assets for each of the next five
years ended December 31 is as follows (in millions):

2002 (fourth quarter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.0
2003 ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7
2004 ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7
2005 ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
2006 ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Effective January 1, 2002, we adopted SFAS No. 144, ‘‘Accounting for the Impairment or Disposal
of Long-Lived Assets.’’ SFAS No. 144 supersedes SFAS No. 121, ‘‘Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of,’’ and some provisions of Accounting
Principles Board (APB) Opinion 30, ‘‘Reporting the Results of Operations—Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions.’’ SFAS No. 144 sets new criteria for determining when an asset can be classified as
held-for-sale as well as modifying the financial statement presentation requirements of operating losses
from discontinued operations. The adoption of SFAS No. 144 had no effect on our consolidated
financial position or results of operations.

24

helath net 02_10q

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